Chama Loans: How to Set Interest, Guarantors and Repayment Rules
Who can borrow, how much, flat vs reducing-balance interest with a worked example, how guarantors work, and what to do when a loan goes unpaid.
Lending to members is how most chamas grow their money. It is also how most chamas fall apart. A loan that is not repaid does more than cost money: it damages trust between members who are often friends, neighbours or relatives.
The groups that lend successfully all do the same thing. They agree on clear chama loan rules before the first shilling goes out. Here is what to decide.
1. Who can borrow
- Membership period. Many groups require three to six months of membership before a member can borrow.
- Good standing. The member must be up to date with contributions and fines.
- One loan at a time, unless the group allows a top-up after part of the loan is repaid.
2. How much a member can borrow
The most common rule links the loan to the member's own savings, for example up to three times their share balance. It keeps loans proportional to commitment, and it limits what the group can lose on one member. Also set an absolute maximum, so a single loan cannot drain the kitty when other members need money too.
3. Interest: flat or reducing balance
This is the decision groups most often get wrong, because the two methods give very different totals at the same rate.
- Flat rate: interest is charged on the original amount for the whole term, even as the member repays.
- Reducing balance: interest is charged only on what the member still owes, so it falls every month.
Worked example: KES 60,000 over 6 months at 2% a month
For simplicity, the reducing-balance example below repays the same KES 10,000 of principal each month.
| Month | Balance owed (KES) | Interest, reducing (KES) | Payment, reducing (KES) | Payment, flat (KES) |
|---|---|---|---|---|
| 1 | 60,000 | 1,200 | 11,200 | 11,200 |
| 2 | 50,000 | 1,000 | 11,000 | 11,200 |
| 3 | 40,000 | 800 | 10,800 | 11,200 |
| 4 | 30,000 | 600 | 10,600 | 11,200 |
| 5 | 20,000 | 400 | 10,400 | 11,200 |
| 6 | 10,000 | 200 | 10,200 | 11,200 |
| Total | 4,200 | 64,200 | 67,200 |
At the same "2% a month", the flat-rate borrower pays KES 7,200 in interest (60,000 × 2% × 6) and the reducing-balance borrower pays KES 4,200. Neither is wrong, but your members must know which one they are signing up for. Reducing balance is easier to defend as fair, and it is how banks and SACCOs quote loans.
Whatever rate you choose, remember that loan interest is usually the chama's main source of profit, and it comes back to members as dividends. Very low interest is not automatically "kinder" to members as a group.
4. Guarantors
Guarantors are members who agree to cover a loan if the borrower cannot. A common rule is that any part of the loan above the borrower's own savings must be guaranteed by other members from their free savings, meaning savings not already committed to guaranteeing someone else.
Example: Wanjiku has KES 20,000 in shares and borrows KES 60,000. The extra KES 40,000 must be guaranteed, for example by two members pledging KES 20,000 each. Until she repays, those pledged amounts are locked and cannot be withdrawn or used to guarantee another loan.
Also decide what happens if the borrower defaults. Usually the borrower's savings are applied first, then the guarantors' pledges in proportion to what each one pledged.
5. Repayment and late payment
- Repayment period. Match it to the loan size. Short loans of one to three months suit emergencies. Longer terms suit school fees or business stock.
- Due date. Use the same day as contributions, so members pay once a month.
- Late payment. Agree on a fixed fine or penalty and when it applies, and write it down.
- Default process. For example: a reminder at 7 days late, an officials' call at 30 days, and recovery from savings and guarantors at 90 days. Agreeing on this in advance keeps it from becoming personal.
6. Who approves loans
Do not let one official approve loans alone. Use a loans committee or require two officials, record every approval in the minutes, and never approve a loan for an official without the others present.
7. Group loans
Some chamas also borrow as a group, from a bank or another lender, to fund an investment. Treat this separately from member loans: record who approved it, how it will be repaid, and how the repayment is shared among members.
Write it into your loan policy
Put all of the above into a one-page loan policy attached to your constitution, and read it out when a new member joins. Our guide to running a successful chama covers the other rules worth writing down.
Running chama loans in ChamaPoint
ChamaPoint's loan module is built around these rules:
- Loan products with your own interest rate and repayment period, calculated on a reducing balance.
- Individual and group loans.
- Loan applications that officials review and approve, with guarantor pledges recorded against guarantors' savings.
- Repayment schedules generated automatically, with repayments by M-Pesa posted to the loan.
- Members see their loan balance and schedule in their own account, so nobody has to ask the treasurer.
See how loans fit alongside contributions, welfare and dividends in the chama management system overview, or start a 7-day free trial and set up your first loan product today.